Have your say: Deposit guarantee extended to wholesale (Updated)

Finance Minister Michael Cullen has announced a wholesale funding guarantee for investment grade financial institutions to help banks in particular to borrow new debt and refinance existing debt on offshore markets. The New Zealand scheme is more expensive for the banks than the Australian scheme that forced the move. (Updated with details, National's approval and my comments lower down). "The decision will help to facilitate improved access to international funding markets for New Zealand banks, a key channel through which New Zealand's substantial external financing needs are met," Cullen said. "While the New Zealand banking system is very sound, we are in an environment where international investors remain risk-averse and where many other governments have guaranteed their banks' debt," he said. "In such an environment, the government believes that it is on balance in the public interest to offer a wholesale funding guarantee facility that can help maintain the economy's access to foreign credit." Cullen said the opt-in scheme was designed to encourage withdrawal from the guarantee once international markets returned to normal. "We have taken a considered response to these issues. We have listened to concerns of the major banks and other industry players, and have carefully considered the approach taken in Australia and in other jurisdictions," Cullen said. National Party Leader John Key said he welcomed the scheme. The facility would be available to investment grade rated institutions and have substantial New Zealand borrowing and lending operations, Treasury Secretary John Whitehead and Reserve Bank Governor Alan Bollard said in a separate statement. Banks and finance companies that are investment grade rated (BBB minus or better) include ANZ National, ASB, BNZ, Westpac, Kiwibank, TSB, Marac Finance and South Canterbury Finance. New issues of senior unsecured negotiable or transferable debt securities will be eligible for inclusion. "The fee schedule is designed to ensure that the facility is used while it is needed, but to encourage issuers to graduate from using the guarantee as market conditions permit," Whitehead and Bollard said. "The guarantee fee will be reviewed regularly and may be adjusted in future for new issues, in light of experience with the scheme," they said. The New Zealand scheme charges AA minus and above rated banks 85 basis points for up to 1 year and 140 basis for over one year. The Australian scheme charges AA rated banks 70 basis points for up to 60 months. The appears to make the New Zealand scheme much more expensive for the New Zealand arms of Australian banks than the parent banks themselves. A rated institutions are charged 145 and 200 basis points respectively for up to and over 1 year respectively, while the Australian scheme charges 100 basis points. The New Zealand scheme charges BBB rated institutions 195 basis points and 250 basis points, which is above Australia's 150 basis points. "As a condition of continuing to receive fresh guarantees on new issues, banks utilising this guarantee facility will be required to maintain an additional 2 per cent capital buffer, on top of the existing required 4 per cent Tier 1 capital. Banks all have at least this much additional capital at present, and maintaining current levels of capital will help protect the Crown's position as guarantor," Bollard and Whitehead said. What I think it might mean Here's my first thoughts about what it might mean. This is unsourced and untested speculation so take it with a big grain of salt. New Zealand's scheme will cost the banks between 45 and 100 basis points more than the Australian scheme, depending on whether the lending is up to 1 year and over 1 year. It will discourage New Zealand banks from using it and may force them to use funding from their parents. Fair enough. It will also make a tidy profit for the taxpayer. It will, however, increase the costs of fixed rate mortgages by, on average 150 basis points, assuming the banks pass on the cost. The final result may be variable rates become more attractive than fixed rates. The Reserve Bank might regain its power to move the economy again in a more direct (Australian like) way. It appears to be set up for the big four banks rather than the likes of Kiwibank, TSB, SBS, Marac Finance or South Canterbury, who have investment grade credit ratings but rarely use offshore funding.  It's designed to used sparingly and for a shortish period. It is much better thought through than the intial retail deposit scheme announced on October 12. The Reserve Bank will, however, have to watch the banks closely to ensure they don't over use the cheaper guarantee for shorter term debt and concentrate the rollover risk at a certain point.  This scheme all another sensible backstop to add to the RMBS programme set up by the Reserve Bank and ready to go for Westpac and ANZ National.  However, there is a slight risk that international investors may see the differing levels of government guarantee costs between Australia and New Zealand as an indication that the New Zealand arms of the Australian banks are weaker. We'll see.  Overall, I don't think there's much chance the taxpayer will end up with the debt stuck on the government's books after a bank collapse. I think it will be used sparingly. One thing is clear. This will not cause a rebound in lending growth back to pre-Credit Crisis levels. If anything, the extra cost will discourage offshore borrowing that supports lending growth in New Zealand. We're in for a long, deep recession and further falls in house prices.